HDG ProShares Hedge Replication

Given the extreme volatility of the market and the diverging opinions as to where the global economy is headed next, many investors have sought to further diversify their portfolios in these uncertain times. One way that some accomplish this is via hedge funds, at least those that subscribe to the traditional definition of the investment vehicle. These funds, unlike many out there today, seek to offer investors uncorrelated returns that can hedge against huge moves in the marketplace, offering a steady return instead.

However, there are a variety of reasons for why most investors remain on the outside of the hedge fund world. First, and arguably most importantly, is the fees. Many hedge funds utilize a ‘two and twenty’ structure which means that the managers take 2% of assets and 20% of profits as expenses, a huge sum when compared to the variety of low-cost options out there. Furthermore, there are usually high minimum investments and the capital is typically tied up for an extended period of time, suggesting poor liquidity for this type of security (see The Active Bear ETF Under The Microscope).

Yet, for investors seeking a way to play this space while avoiding the extreme fees of the current products in the in hedge fund industry, there are a few hedge fund ETFs that could make for excellent alternatives. All three of these products charge investors a fraction of the cost that ‘original’ hedge funds force upon investors while all three trade on a daily basis giving investors high levels of liquidity that their non-ETF cousins cannot match (see Inside The SuperDividend ETF).

Thanks to these potential advantages and the unclear direction of the market, many might want to take a closer look at the space for investment. For those that do, we highlight a few of the great options in detail below:

IndexIQ Hedge Multi-Strategy Tracker ETF (QAI)

One of the more popular, and long-running, ETFs in the hedge fund space is QAI, a $170 million fund from IndexIQ. The fund seeks to track the IQ Hedge Multi-Strategy index which attempts to replicate the risk-adjusted return characteristics of hedge funds using various hedge fund investment styles, including long/short equity, global macro, market neutral, event-driven, fixed income arbitrage and emerging markets. This gives the fund extreme flexibility allowing the product to invest in all types of assets in order to accomplish its objective (also read Play This Top Ranked Industry With This Sector ETF).

Thanks to this focus, the fund’s list of holdings runs the gambit across all the major asset classes. Among the top ten holdings in this fund-of-funds are investment grade corporate bonds (LQD), exposure to the EAFE region (EFA), a G10 Currency fund (DBV), and a gold futures ETN (DGL). However, investors should note that thanks to the fund’s high annual turnover of 145%, these holdings are unlikely to remain at the top for too long, especially if markets take a sharp turn. QAI is pretty much flat on the year—gaining marginally—but the product’s has outperformed the S&P 500 over the time frame and has a beta with this important index of just 0.3.

ProShares Hedge Replication ETF (HDG)

ProShares is primarily known for its work in the short and leveraged corners of the ETF world but its HDG could also make for an interesting choice as well. The fund tracks the Merrill Lynch Factor Model – Exchange Series which was seeks to provide the risk and return characteristics of the hedge fund asset class by targeting a high correlation to HFRI Fund Weighted Composite Index (HFRI). In order to do this, the benchmark utilizes a systematic model to establish, each month, weighted long or short (or, in certain cases, long or flat) positions in six underlying factors. The factors that comprise the benchmark are the (1) S&P 500 Total Return Index, (2) MSCI EAFE US Dollar Net Total Return Index, (3) MSCI Emerging Markets US Dollar Net Total Return Index, (4) Russell 2000 Total Return Index, (5) three-month U.S. Treasury bills, and (6) ProShares UltraShort Euro ETF.

Thanks to the uncertain economy, the fund is heavily exposed to short term Treasury bills at this current time as they make up about 62% of the portfolio. EAFE holdings make up another 16% while emerging markets and the Russell 2000 combine for another 15% of the fund. Thanks to the limited pool of assets, the fund is able to have a little less on the turnover front and can also pass this on to investors in the form of lower fees. In terms of performance, however, the fund has had somewhat of a rough year, losing about 2.9% in the period (read Avoid Turmoil With The Community Bank ETF).

IndexIQ Hedge Macro Tracker ETF (MCRO)

Another option for investors from IndexIQ is this macro strategy tracking fund MCRO. The product seeks to give investors the ability to replicate the risk-adjusted return characteristics of a combination of hedge funds pursuing a macro strategy and hedge funds pursuing an emerging markets strategy. This technique looks to make plays on the market based on broad economic and political views, giving the fund a potential tilt towards international markets (see UBS Launches Risk On, Risk Off ETNs).

Much like the other hedge fund ETFs on the list, MCRO is heavily tilted towards bond holdings at this time. Beyond this heavy bond exposure, the fund does count among its top ten holdings a popular emerging market equity fund, an international real estate fund, gold, and exposure to a basket of G10 currencies. Thanks to this international focus, the fund does cost a couple of basis points more than its peers due to the slightly higher acquired fund fees, putting the expense ratio at 1.09%. In terms of performance, the market slide and the heavy international exposure really hurt this fund in September, pushing MCRO down to a loss of about 2.6% for the year.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>

 
Zacks Investment Research
 
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report